The Benefits of Investing in Real Estate

Most people who are homeowners had the benefits of ownership explained to them when they bought their first home. This is assuming of course that they were lucky enough to have a savvy real estate agent, attorney, lender or accountant to explain. However, while those same people may understand the advantages of owning their own home; few will ever venture out into investing in real estate as an income producing method.

Maybe as an investor, you are comfortable in investing in your 401K or a Roth IRA? Or, perhaps you get really excited about how the stock market can double or triple your money in stocks, bonds, mutual funds and the latest craze (FOREX)? However, when you consider real estate investing, you may think that it will require too much time, energy and risk for you to become involved.

If this has been your thought process, then stop for a moment and think. When your stock price tumbles, or you bet on the wrong currency horse with FOREX, you will suffer a loss. With the first, you have to wait until that particular stock recovers to get your money back. With the latter example, you might as well have placed a losing bet at the roulette wheel or the craps table, because your money is gone! Winning and losing are not the only variables that put your money at risk in the stock market either. Brokers are not cheap, but it is much more costly if you do not have one. Therefore a broker fee per transaction is just the cost of doing business in that world.

With real estate investment properties, (even when the market price dips to the unprecedented lows that the Country is experiencing now) your money is not gone. In fact, as far as price is concerned, you play the waiting game like you would if your stock deflated. In other words, you have to sell at a loss or wait for the market to recover to gain any type of equity. The major difference between the two is that in buying rental property, you will still see cash flowing in, even though the property value has decreased.

For instance, a brick building containing 4-2 bedroom apartments may have sold in (any area) USA for $280,000 in 2003. Market rents may have been around $575-$600 per month. With an interest rates at 7%, the income derived monthly would have barely covered expenses. Many of those investors are now upside down on their mortgages (meaning their properties now are worth less than what they paid for them). But unlike, the investor who just dumped $280,000 into stocks (with his investment now worth about $150,000 to sell) the investor with the real estate still has rents coming in. Even though his property value is less, his rents have increased by $50-$75 per unit that allows for some cash flow. Furthermore, the investor with the real estate only invested 20% of the full amount (not the full price) so his down payment and (his credit) is all that is at risk if he can not hold out for market recovery due to hardship, etc.

With selling prices at an all time low, fueled by short sales and REO properties, it is possible to buy that same example building for approximately $150,000. If you pay $30,000 down, at 5% interest for 25 years, your payment will be $702 per month. Fully occupied at $650 per unit, you will have $1900 per month left after your principal and interest payment. Of course, you will also need to deduct from this amount your monthly real estate tax and insurance obligation, plus upkeep and management fees. Even in the highest taxed area though, you will still yield a higher return on your dollar in comparison to other investments. Therefore, the next time you take a look at your portfolio, consider investing in real estate for a sure way to increase your return.

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